Should the EU’s welfare states retire?

In Belgium, Denmark and the United Kingdom, politicians are caught in a bind about how to engineer changes to pension and welfare systems. Low birth-rates and longer life expectancy will produce populations where the elderly outnumber the young. Fast-changing employment patterns could increase the strain on unemployment benefits unless more is done to create jobs that will offset the jobs lost.

The nightmare scenario, which threatens with varying degrees of urgency, is that the size of the working population will become too small to pay for the non-working, whether young, old or unemployed.

In their very different ways, the governments of these countries - and others - are trying to respond to these challenges, while taking care not to stake the next election on reforms whose benefits will be felt only in the long term.

A favoured technique is to set up a committee of advisers, in an effort to build cross-party consensus on future policy. In the UK, a Pensions Commission under the chairmanship of Adair Turner issued its final report at the end of November. It recommended raising the state pension age to 66 by 2030 and to 68 by 2050. It said state pension entitlement should be determined by residency rather than national insurance contributions. It recommended that from 2010 pensions should increase in line with earnings, as used to be the case, rather than prices and that means-testing for eligibility should be abolished.

Publication of the report was overshadowed by reported disputes between Prime Minister Tony Blair and his Finance Minister Gordon Brown. Brown would, if he succeeded Blair as prime minister, inherit the consequences and he was supposedly concerned about the affordability of the recommendations, particularly the abolition of means tests and reinstating the link with earnings. So much for the attempt to build political consensus.

In Belgium, the Generation Pact is an attempt to keep people working longer, redressing incentives and, most controversially, discouraging the use of so-called bridge pensions for early retirement. The Belgian employers' federation warns that only 30% of those aged between 55 and 65 are working, compared with an EU average of 42%. The Generation Pact has been attacked by the Socialist, Christian Democrat and Liberal trade unions, disowning elements of what has been agreed by their parent parties.

In Denmark, a Welfare Commission has just published its recommendations for reform. Denmark's model of flexicurity has been much talked about elsewhere in the EU by those envious of low unemployment and generous welfare provision. Danish Labour Minister Claus Hjort Frederiksen, who was in Brussels last week, pointed out that one-third of the workforce changed jobs each year. Hiring and firing was made easy but was balanced by generous income support and re-training opportunities.

Nevertheless, what the welfare commission suggests is that the existing model cannot remain intact. There, too, the age of retirement must be progressively raised. It suggests that the eligibility period for unemployment benefits should be reduced and payments introduced for healthcare. In some respects this is nothing new. The introduction of Denmark's universal pensions, as Peter Baldwin sets out in his comparative history of European welfare states, The Politics of Social Solidarity, saw pension commissions and similar arguments about means-testing and prolonging the working life.

But in other ways, things are very different. The strength of the unions has been a defining characteristic of the Danish system but might not remain so. The Socialists have criticised reforms to flexicurity which they say will weaken the position of the unions, by taking away from them responsibility for job centres. Frederiksen, too, was warning that the European Commission's challenge to Sweden in the Vaxholm case risked upsetting the assumption of the Danish set-up that wages would be decided on terms agreed with the Danish unions.

In Denmark, Prime Minister Anders Fogh Rasmussen is chairing another commission on globalisation, which is supposed to present conclusions next year. The domestic circumstances of the UK, Belgium and Denmark are different, but no national welfare system is an island, insulated from European or global influence.

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